B.C.'s cannabis tax could reap $110 million or more in a few years: consultant

Give it a few years, but British Columbia might see a tax windfall of over $110 million per year from the sale of legal cannabis, if its experience is anything like Washington State.

“When you’re three or four years into your market and pretty well established, I believe that’s within possibility,” said James MacRae, an industry consultant with the firm Straight Lines Analytics.

The figure MacRae calculated is $112 million, based on B.C. being about two-thirds the size of Washington State’s market and using a basic description of Canada’s tax regime.

The federal framework calls for an excise tax on cannabis of $1 per gram for sale prices under $10 per gram or 10 per cent for prices over $10 per gram with revenues split 75 per cent to provinces and 25 per cent to the federal government.

Federal GST will also apply to cannabis sales while the province has not revealed whether PST will be applied.

B.C., in its most recent budget estimates, stated the province might see $50 million in cannabis tax revenues over the first partial year of legalization, and $75 million per year in the subsequent two years.

The revenue estimates that B.C. has cited, however, do not account for the cost of establishing the administration of taxes and enforcement of new rules.

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Alberta, in its last budget, estimated those costs will deal its government a $90-million loss for the first two years of legalization before it sees net $37 million in annual taxes.

“My experience is that government tends to under promise tax revenues so they can show they’re exceeding (targets),” MacRae said.

The credit-rating agency Moody’s, in a report released Tuesday, said U.S. states that have legalized cannabis have brought in more revenue than it has cost to regulate the substance, but not by a lot.

In B.C., at $1 per gram, the excise tax would be a considerable hit to the price of cannabis that can sometimes be had for $5 per gram and for lower-potency products such as shake or trim as low as $1 per gram, argues pot advocate Dana Larsen.

“It’s going to lead to some very expensive cannabis and I think that’s going to be a problem,” said Larsen, director of the advocacy group Sensible B.C. “The more expensive (cannabis) is, the more people are going to continue to get it from the current free market, dispensaries or whatever you want to call it.”

And if heavy users, who make up most of the market, continue to avoid the legal side of it, “it absolutely will not be successful.”

Larsen argues that applying GST and PST to cannabis sales should generate more than enough revenue to fund administration of rules around legal marijuana without an additional excise tax, and said there should be no taxes at all on medical marijuana.

“That, to me, is unconscionable and wrong,” Larsen said.

Any excise tax, he said, should be a straight percentage of the sales price.

That is how Washington and Colorado, the earlier U.S. states to adopt legalization, approach taxation.

Washington, which revised a three-tiered tax regime to a single, 37-per-cent excise tax on sales, collected US$319 million in cannabis taxes and licensing fees in 2017 on US$1.31 billion in sales. That’s 69 per cent higher than its 2016 tax take of US$189 million on US$786.4 million in sales.

However, between 2015 and 2017, gross revenue from cannabis has only amounted to 1.2 per cent of revenue to the state’s general revenue fund, according to the Moody’s report.

Colorado has two taxes, a 15-per-cent excise tax and a 15-per-cent marijuana sales tax. For 2017, the state collected US$247.4 million in cannabis taxes on US$1.5 billion in marijuana sales. That was 28 per cent higher than the state’s 2016 in tax revenue of US$193.6 million on US$1.3 billion in sales.

That has only amounted to about two per cent of Colorado’s state’s budget, Moody’s said.

Most of the states that have legalized marijuana earmark the revenue for law enforcement, drug treatment and other specific programs, which doesn’t help the states’ financial flexibility.

Twenty-nine states now allow marijuana for either medicinal or recreational uses, and the business is growing quickly. Moody’s cited data from the market research firm Euromonitor International that projects it will grow from a $5.4 billion business in the U.S. in 2015 to $16 billion by 2020.

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